The renminbi increases its proportion in the basket of IMF reserves

The People’s Bank of China said that the IMF has increased the proportion of the yuan from 10.92% to 12.28% in the Special Drawing Rights (SDR) currency basket. This is the first periodic review since the Chinese currency was included in the SDR basket in 2016.

In light of the results, the People’s Bank of China also stated that it and other regulators “will continue to resolutely promote the opening of China’s financial markets”. The central bank also promised to simplify the process of foreign investors entering the Chinese market.

The SDR is an international reserve asset that can be converted into five currencies. The renminbi’s entry to the SDR made it one of the five global reserve currencies in 2016, following years of efforts by the Chinese authorities to promote its use globally.

This change comes amid a sharp depreciation of the yuan since the end of April, as it faces a double impact. The first, China’s economic growth slows down due to anti-epidemic blockades. Second, capital outflows because the country’s monetary policy divergence with the US is widening.

The People’s Bank of China set the reference rate for the yuan at a lower-than-expected level for the ninth consecutive day on May 13, continuing to maintain its stance on using fiscal and monetary tools. currency to support the economy. The agency also recently committed to extending interbank forex trading times, offering more asset classes and improving information disclosure to better facilitate investment by global institutions. .

However, USD is the currency with the fastest increasing amplitude in the SDR basket, currently accounting for 43.38%. While the share of the euro, Japanese yen and British pound fell. The weight ratings of currencies remained the same after this review and the yuan continued to be in third place. IMF executives concur that so far, neither the pandemic nor developments in financial technology have had a major impact on the relative role of currencies in the SDR basket.

Normally, every five years, the IMF reviews the amount each member contributes. The latest assessment was about a year later than originally expected due to Covid-19.

The SDR was created in 1969 by the International Monetary Fund as an international reserve asset to supplement the reserve assets of member countries. With the development of international trade and finance, the reserve resources mainly in gold and USD of countries are increasingly inadequate. The SDR provides member countries with an additional resource to be able to maintain the exchange rate of their local currencies.

The IMF accepts contributions, plus special emergency grants to borrow from some member countries, to stabilize money supply and demand, exchange rates, and short-term balance of payments. Currencies included in the SDR basket must meet two criteria: the foreign trade criterion and the free use criterion. A currency meets the foreign trade criterion if the issuing country is an IMF member or a monetary union that includes IMF members and is also one of the world’s top five exporters. A freely usable IMF currency must be widely used to make payments for international transactions and be widely traded in the major foreign exchange markets.

As of last August, a total of 660.7 billion SDR (approximately $943 billion) had been allocated. Of which, the largest allocation in history is about SDR 456 billion to address global long-term reserve needs and help countries cope with the impact of the pandemic.

Xiao Gu (according to Bloomberg)